Pages

Thursday, July 7, 2016

What's the value? Book or Good Will?

This really isn't a posting about accounting ...

But, when the accounting industry figured out that most businesses are worth a lot more than their salvage value, even more than the market value of tangible assets -- like inventory, buildings, and tools -- the accounants had to invent an asset and terminology to cover the gap.

Invention: "Good will".
It even sounds like it belongs in a business. Who doesn't want good will?

Good Will is what makes the balance sheet balance when, for example, the "market cap" or owner's interest is so much more than the tangibles. Just add a dolop of "good will" to assets, and presto: balance sheet balance!*

So, now we to come to projects -- why else write this stuff? Surely not to push a book!

Notice on the left scale there is first the project budget, but the scale goes beyond to encompass the unrealized business value. What we PMs call it "project budget" is what accountants call "book value" (the terminology is really just a mapping from one domain -- projects -- to another domain -- accounting)

Thus, the "book value" will change over the course of the project. In the beginnng, book value is zero; everything about the project is good will since all of the to-be actual cost is still sitting in other assets -- like cash, and all the to-be business benefits are unrealized.

But time moves along; the project gets completed. At the post-project operations moment, what do we have? Tangibly, we have all the artifacts of the project -- deliverables, tooling, intellectual property. We can put their cost down as the book value of the project. That's what OPM -- other people's money -- bought in the near term.

But, the real intent of the OPM investment is the (far term) business value ... which is initially all good will, even at project finish, but ultimately turns real with product success. So, if that's the intent, what's the PM role in realizing that intent?

The best answer is in Chapter 9 of my book, but if you've not already grasped it, the short answer is this: the PM's priorites are two-fold

Near-term: it's all about the utility of book value -- getting to DONE or complete with the assets assigned.

Far-term: it's all about influencing the realization of business value -- turning good will into realizable gains

How to do the second? The PM can really have an influence on the business value and the project's good will by serving up: